Unilateral free trade is the key to prosperity

27 Nov 2005

Article by John Blundell in The Business

IT is one of the minor glories of the US Constitution. Article One, Section Nine denies the power to the federal government to impose any export taxes. Why did they write that in? It was because the ludicrous protective system operated by Britain so exasperated the colonists.

The flip side of export taxes is import taxes  tariffs. These barriers to trade have been slowly coming down since the multilateral trade agreements under the General Agreement of Tariffs & Trade (GATT) and now under the World Trade Organisation (WTO). These permanent jostlings to open markets since 1947 are the main reason we are so prosperous. Yet, while Im happy to applaud these successes, everyone seems to forget the happier and easier option to all these multilateral huffings and puffings  unilateral free trade.

The three great patron saints of free trade ideas are Adam Smith, David Ricardo and John Stuart Mill. They were advocates of unilateral free trade and thought the endless wranglings to negotiate harmonious mutual tariff reductions largely wrong-headed.

My guess is not many readers will have got past my first invocation of that term multilateral. It has a certain glow of tedium; all jargon does. But I feel sad that an ideal as noble as free trade gets hidden behind the fog of the WTO. It loses all urgency or morality. The Kennedy Round of opening international trade was admirable. So is the present Doha Round currently juggernauting its way to failure in Hong Kong next year.

The great moments in the history of free trade are those episodes when tariffs were scrapped. It happened in antiquity. It happened in medieval city states. The results were great surges of prosperity. Athens was a free trade centre. Venice was a free port  not a museum. Amsterdam was a free port too. After the smashing of Britains Corn Laws and other tariffs in 1846, Britain flourished.

Economic historians argue that Richard Cobden, the brilliant exponent of free trade, is also the father of its weaker cousin  multilateralism. In 1860 he negotiated reciprocal trade liberalisation with France. In Cobdens mind, and that of his French equivalent Chevalier, was the fertile and beautiful thought that free trade is the basis not just for commercial dynamism but of peace too. They were at one on that important idea with the great French economist Frédéric Bastiat, who taught in the mid-19th century, if goods dont cross borders then armies will.

In those days, those who supported radicalism, reform or poverty reduction, those we now term the Left in politics, were all advocates of free trade, something which is rarely understood in todays intellectual climate. It was the closed minds of the Conservatives  the aristocracy and landowners and early industrialists  that opposed the opening up of markets and the freedom for individuals and businesses to trade as they wished.

We are now in a strange position. Those on the Left and the Right yawn disinterestedly about this vital topic. It is not in the main repertoire of political themes. It exists only in alien abstractions. There is no democratic leverage. Everyone agrees the European Union (EU) Common Agricultural Policy is an expensive folly. Yet it never changes. It is untouchable.

The assumption of multilateralism is so dominant that we forget the great contemporary beacons of unilateral free trade  Hong Kong and Singapore, island nations that have benefited immensely from buying and selling with the world. The official story is that China took over Hong Kong in 1997; the truth is that Hong Kongs only ideal  free trade  captured China.

In 1874 UK tariffs were tiny and matched directly by internal duties on spirits or tobacco. There was no effort to regard imports as a regrettable necessity. They were a measure of success. So, I would suggest Britain adopt a simple policy of dropping all its barriers without waiting for reciprocal action  except we have surrendered all such powers to the European Commission. The EU is the inheritor of that other twisted version of free trade  bi-lateralism. The EU is a wider version of the German ideal of the zollverien  a customs union. It falls far short of the Ricardian ideal.

The World Bank, the expert at plotting these plots, reports that exhaustion often sets in to multilateral talks meaning that many acts of trade liberalisation are still unilateral. So it is not just an abstract ideal.

Protectionism is a bankrupt idea. Yet it still impoverishes the Third World. All of Latin America and Africa is enmeshed and immiserated by protectionism. Can we even imagine if the Doha Round stalls, as it will, that world leaders will say, oh well, it is regrettable but well just lower our tariffs anyway. Everyone is locked into the erroneous assumption that we can only drop our barriers if you drop yours.

Unilateral free trade enriches the nation that adopts it because it unleashes the great magic of comparative advantage. Free trade makes you information rich. The details may be complex; the ideal could not be more simple.

John Blundell is director general of the Institute of Economic Affairs